Personal Income and Expenditures Data Should be Ignored in August 2011

Personal Consumption Expenditure (PCE) is the spending of consumers. This spending is the order of magnitude of the size of GDP, and roughly 60% of PCE spending ends up being counted in GDP. In the USA, the consumer is the economy.  Likewise, personal income  is the money consumers earn to spend.

In August 2011 month-over-month, real (inflation adjusted) income is down slightly 0.3% while real spending was unchanged.  Not good, but not recessionary either.

I am not sure we should be reacting to these monthly numbers.

  • There is a concern the seasonal adjustments are not picking up a new New Normal effect.
  • The backward revisions are invalidating the data in the issuing month.

Last month the PCE graph:

And what the August graph looks like:

As this data is noisy, I have added a three month rolling average (red line).  Because of the noise and backward revisions, there is no choice but to follow the 3 month rolling average.  The headline table follows, and again I follow the inflation adjusted (chained) numbers.  Disposable income is the income left after the tax man.

From the press release on PCE movements:

Purchases of durable goods increased 0.1 percent, compared with an increase of 2.2 percent [in July].  Purchases of nondurable goods decreased 0.4 percent, compared with a decrease of 0.5 percent [in July]. Purchases of services increased 0.1 percent, compared with an increase of 0.4 percent [in July].

The reason expenditures (PCE) can grow while income falls is because the consumers are returning to the credit trough.  The fall in inflation adjusted (chained) personal income has both good and bad implications (improvement in global competitive wages but a decline in future ability of consumers to consume).

This personal income and personal consumption expenditure data by itself is not a good tool to warn of an upcoming recession.  Econintersect has shown that PCE is a distraction for recession watchers, with a 30% accuracy of indicating a recession start, and a 70% incidence of indicating a non-recessionary event.

Readers are warned that this article is based on seasonally adjusted data. Monthly non-adjusted data is not available. Econintersect has concerns that seasonally adjusted data is not accurate in the New Normal.

The above graph plots year-over-year data instead of month-over-month which is likely a more accurate approach to understanding PCE.  Again, this is seasonally adjusted data – and there should NOT be continuing occurrence of year-over-year single month blips every few months (red circles on above graph).

Econintersect’s Economic Index has the worst month this year as August.  Therefore this mediocre data comes as no surprise.

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